CALGARY(Reuters) - Spurred on by rising crude prices, the shares of Canada's oil producers have posted big gains in recent months as investors anticipate higher earnings for the sector.But that market strength may moderate as a rising Canadian dollar eats into the profits.

Geopolitical turmoil and supply fears have strengthened oil prices after a weak start to the year. Since touching a low of $50.48 a barrel in mid-January, the benchmark near-month futures contract on the New York Mercantile Exchange has risen 35 percent to close Friday at $68.00.

For oil producers, and their investors, high prices are always welcome as commodity gains boost profits. After touching a 2007 low of 295.97 early in the year, the Toronto Stock Exchange's main energy index has since risen by nearly a fourth, ending Friday at 367.87.

However, gains by US dollar-priced crude have been squeezed by a rising Canadian currency.

A weakened US dollar is never a good thing for Canadian producers, as it cuts into profits when they convert their greenbacks into Canadian loonies.

"Everything else being equal, a stronger Canadian dollar vis-a-vis the US dollar is unequivocally negative for the (oil and gas) sector," says Garey Aitken, who manages energy stocks for Bissett Investment Management in Calgary.

"That's because the sector is a price-taker in commodities that are US dollar denominated."

At the start of the year, the Canadian dollar was worth 86 US cents. Last Friday it fetched 94 US cents, a 9.3 percent gain since the start of 2007.

For the producers who sell oil priced in US dollars and report their earnings in Canadian currency, the rising loonie (the nickname that comes from the loon portrayed on the C$1 coin) cuts straight to the bottom line.

Talisman Energy, Canada's third-largest independent oil producer, estimates that for every rise of one US cent in the value of the Canadian dollar its net income is cut by C$40 million and cash flow is trimmed by C$64 million.